In This Issue...

U.S. Shouldn’t Play the Deadbeat

Both negotiations and the war of words continue over raising the federal debt limit and curbing future deficits. Further talks are planned this week, with the Treasury continuing to warn that congressional inaction by Aug. 2 risks “catastrophic” economic damage from a government default.

After weekend talks failed to break the impasse, President Obama used a Monday press conference to put pressure on Republicans to show more flexibility, saying he was prepared to “take significant heat” from his own party for the sake of a good compromise. He also ruled out proposals that would only take care of the debt limit for a few weeks or months.

Republicans on Monday continued to push for large cuts in some spending programs, notably those that were previously discussed in bipartisan talks led by Vice President Joe Biden.

Contrary to claims by some in Congress and on the campaign trail, the debt limit must be raised soon to avoid default. Stirring doubts about the government’s willingness to pay its bills on time could produce chaos in global markets and cost U.S. taxpayers hundreds of billions of dollars a year in higher interest costs.

In a blog post last week, Bixby encouraged elected officials to work towards a comprehensive long-term budget plan that would be approved as the debt limit was increased. “Our fiscal challenges demand an ambitious approach. . . ,” he wrote. “Since negotiations on short-term objectives have gained little traction, a football analogy is apt: go long.”

Obama has pushed for a deal that would lower deficits in the coming years by a total of $4 trillion, roughly the size that some bipartisan panels have urged. Last weekend, however, Republicans indicated that they did not think such a large package was feasible.

Conrad Unveils Budget Framework

Senate Budget Committee Chairman Kent Conrad (D-N.D.) outlined a budget framework Monday that he said would reduce deficits by $4 trillion between 2012 and 2021.

Democrats on the committee developed the framework, which Conrad presented in a speech on the Senate floor. As a percentage of Gross Domestic Product (GDP), deficits would decline from 9.3 percent in 2011 to 1.3 percent by 2021.

The framework assumes that the deficit reduction will be divided evenly between spending reductions and revenue increases. Over ten years, spending would average 22.1 percent of GDP compared to 24 percent in 2011. Revenues would average 19.5 percent over the ten years compared to 14.8 percent in 2011.

The framework includes a 3-year freeze for the White House and legislative branch budgets, $886 billion in reduced security spending, an extension of tax cuts for the middle class, and a proposal intended to simplify the tax code and reduce tax expenditures. The framework does not rely on any new Medicare or Social Security proposals for significant deficit reduction.

The committee has not scheduled a meeting to formally consider a budget resolution, which would include many of the details missing from the framework. Conrad has said that the committee will not act before the negotiations between the President and congressional leaders are complete. Under the Budget Act, a budget resolution should have been completed by April 15.

The committee’s ranking member, Sen. Jeff Sessions (R-Al.) called the framework a “phantom budget” lacking sufficient detail to be “read, ascertained, evaluated, and scored.” Sessions criticized Democrats for failing to consider a traditional budget resolution using the process required by law and raised concerns about defense cuts and revenue increases assumed in the plan.

How to Evaluate Proposed Tax Cuts

Although elected officials often talk about tax cuts helping the economy, whether such reductions live up to the high expectations for them depends on the circumstances. Three key factors to consider: the state of the economy, how a proposed cut would be structured, and how the government would pay for it.

“Tax cuts aren’t the ‘be-all and end-all’ of economic policy that they’re often claimed to be, no matter how attractive they might be politically,” Diane Lim Rogers, chief economist for The Concord Coalition, cautioned in a blog post Monday.

In a downturn with closed factories and unemployed workers, it takes greater demand for goods and services to boost the economy. So tax cuts aimed at households and businesses that are most likely to spend extra cash will be most effective.

With full employment and little excess capacity, on the other hand, growth requires tax policies that increase the work force, savings and investment in productive capacity.

Deficit financing is problematic if a tax cut is supposed to encourage supply-side, longer-term growth. A better approach: Pay for the tax cuts with spending reductions or revenue increases. In a recession, however, there is a risk that this will place excessive drag on the economy.

Estimates on War Costs Should Be More Realistic

Recent reports by Brown University and the Congressional Budget Office (CBO) underscore the need for Congress to honestly account for war costs, both past and present, and to factor them into long-range planning.

The Brown University report, authored by Neta C. Crawford and Catherine Lutz of the school’s Eisenhower Research Project, says the U.S. has spent $2.3 trillion to $2.6 trillion on operations in Iraq, Afghanistan and Pakistan since 2001 -- much higher than the $1 trillion the President cites.

The study looks not just at what the Pentagon allocates directly to the conflicts but such things as soldiers’ pay, war-related foreign assistance and war-related debt. The study concludes that Iraq, Afghanistan and Pakistan will ultimately cost somewhere between $3.7 trillion and $4.4 trillion, which takes into account future fighting and veterans’ health care.

CBO recently compared its 5-year projections of defense spending with those by the Department of Defense. Due to rising health care costs and the fact that the Pentagon usually underestimates the cost of developing and buying weapons by 20 percent to 30 percent, the CBO says, costs over the next five years will come in $64 billion higher than Defense projections.

As the authors of the Brown University study put it, many war costs are “...invisible to Americans, buried in a variety of budgets, and so have not been counted or assessed.” Congress, the administration and the Pentagon should work to ensure that military cost projections are more transparent, complete and realistic.

Debits & Credits

Undergraduate Math: In calling for political and business leaders to focus on more responsible fiscal choices, Sen. Mark Warner (D-Va.) said: “Federal spending is at an all-time high of 25 percent of our GDP, and our government revenue is about 15 percent of GDP, a 60-year low. It doesn’t take an MBA to recognize that the only way to close that gap and restore fiscal stability is to attack both sides of the ledger. We must cut spending, including defense and entitlements, and we must find reasonable ways to increase revenue.”

Ben Nelson’s Failed Tablecloth Trick: While Democrats and Republicans are negotiating over possible revenue increases and reforms of Social Security and Medicare to help curb future deficits, Sen. Ben Nelson (D-Neb.) vigorously denounced all of those options in a single press release. That didn’t stop him, however, from bemoaning the federal debt – or noting that he had to give up a trip to Pakistan and Afghanistan because last week’s Senate recess was cancelled.